3:19 PM
Mar 16, 2018
 |  BioCentury  |  Finance

Hong Kong’s new chapter

How HKEX’s proposed biotech chapter is set up for long-term success

Introducing a biotech chapter to the Hong Kong stock exchange fills a massive void in the region’s innovation ecosystem, but won’t come without risks.

It promises to create a long sought public capital market for biotechs in China and the Asia-Pacific region, which have been shut out by revenue and profit thresholds.

But to enable a sustainable market, Hong Kong Exchanges and Clearing Ltd. (HKEX) will need to make careful decisions on how it defines quality and how many companies it clears to list. The risk is that too many failures too early could sour investor appetite in the market’s infancy.

On March 23, comments are due for the second round of the exchange’s consultation paper, issued Feb. 23, which contains proposals to amend its listing rules. This would be accomplished by creating two new chapters: one for biotechs that don’t meet current financial eligibility rules and one for companies with weighted voting rights (WVR) or dual-class equity structures. The initial version was released in December, and followed a preliminary concept paper published last June.

The aim is to finalize and implement the proposals by the end of April.

The proposals are part of a modernization campaign by the exchange aimed at keeping “new economy” companies at home.

The move will introduce a huge investor base -- comprised of institutional as well as retail capital -- to new business models and valuation paradigms, and the unfamiliar risk-reward dynamics of biotech.

HKEX is addressing the risks through a number of suitability tests, guidances, listing requirements and shareholder protections (see “Follow the Rules”).

Table: Follow the rules

Hong Kong Exchanges and Clearing Ltd. (HKEX) has outlined both requirements and guidelines that spell out criteria for determining suitability for public listing via its proposed biotech chapter. Stakeholders who spoke with BioCentury think the requirements are achievable for quality IPOs, but noted use of “fuzzy” language in the guidelines, for example in undefined terms such as “durable patent” and “sophisticated investor.” The requirements also aim to ensure a 25% public liquidity threshold by excluding IPO shares bought by “cornerstone investors,” defined as expert investors who receive guaranteed allocations in the IPO book building process, as well as pre-IPO investors who buy into the deal. While the restriction is analogous to limiting insider participation on a NASDAQ IPO, some stakeholders fear it could constrain book building or force unnecessary dilution on issuers. HKEX also proposed post-listing risk management measures including an accelerated de-listing process to prevent shell companies from floating indefinitely. HKEX approval also would be required for transactions that fundamentally change a company’s principal line of business, and a requirement that biotech tickers end with the letter “B.” Source: HKEX consultation paper

Market cap minimumMinimum expected market capitalization at the time of listing on the Exchange of HK$1.5 billion ($191.4 million)
Track recordCompany has been in operation in current line of business for at least two financial years with substantially the same management team
Working capitalCompany has sufficient working capital to cover at least 125% of the group's costs for at least 12 months from the date of publication of its listing document, including the IPO proceeds. Costs include general, administrative and operating costs and R&D costs, but not capital expenditures
InvestorsCornerstone investors will not count towards minimum initial public float requirement of 25% at listing or during six month lock-up period. Pre-IPO investors can participate in IPO, but their shares will not count towards the minimum initial public float requirement
DisclosureMandatory disclosures include description of Core Product, stage of development, safety data, regulatory approvals or communications, pathway and timeline to commercialization, granted and applied for patents, cash operating cost estimates including R&D, and specific clinical and regulatory risks, among others
Continuing obligationsAnnual and half-yearly reports must include details of R&D activities for Core Product including key stages of development needed to reach commercialization and estimated timeline, R&D expenditure summary and prominently disclosed warning that Core Product may not be successfully developed and marketed
Development statusCompany has developed at least one Core Product beyond the concept stage; for small molecules and biologics, this product has completed Phase I with no regulator objection to starting Phase II; other products considered on case by case basis
R&D focusCompany is primarily engaged in R&D for the purposes of developing its Core Product(s) for a minimum of 12 months prior to listing
Use of proceedsCompany's primary reason for listing is to raise capital for R&D aimed at commercializing its Core Product(s)
Intellectual propertyCompany has "durable patent(s)," registered patent(s), patent application(s) and/or intellectual property in relation to its Core Product(s)
InvestorsCompany has received meaningful third-party investment from at least one "sophisticated investor" at least six months before the proposed listing date, which must be maintained at the...

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